Archive for July, 2011:

THE PRICE to buy gold in US Dollars oscillated Thursday morning London time – soaring to just under $1620 an ounce before easing back – while stocks fell and commodities were mixed as Washington prepared for a postponed debt ceiling vote.

On Wednesday gold price set a new intraday high in Dollar terms of $1628 per ounce in New York trade – a jump of 1.75% from last Friday’s close.

The price to buy silver meantime hovered around $40.28 per ounce – up 0.5% on the week.

The Euro price to buy gold meantime rose steadily throughout Thursday morning to hit €1133 per ounce – a 1.6% gain for the week so far.

“The so-called ‘ugly competition’ between the Dollar and the Euro just seems to get uglier all the time,” says Steve Barrow, currency analyst at Standard Bank.

“The debt ceiling still looms large in the markets with gold finding support from the dysfunctional discussions,” adds one London bullion dealer.

The US House of Representatives is due to vote on speaker John Boehner’s deficit cutting plan on Thursday – after it was postponed yesterday when the Congressional Budget Office found it did not deliver the claimed spending cuts.

Many of Boehner’s fellow Republicans have expressed dissatisfaction that the plan does not go far enough, while Democrat Harry Reid, Senate majority leader, says it will be “dead on arrival”.

Nevertheless, Reid says he may incorporate elements of Boehner’s plan into his own rival proposal.

The US Treasury has said it expects to hit its $14.3 trillion borrowing limit next Tuesday.

“Should a default occur gold will be vulnerable to a sharp correction as investors cut their risk exposure and use gold to generate cash,” warns Swiss precious metals group MKS.

“But as seen previously once the initial sell-off is complete there are likely to be further upside gains.”

Even if Congress agrees to raise the debt ceiling “America’s problems would not be solved,” said Germany’s finance minister Wolfgang Schaeuble on Thursday.

“The main issue is overly high debt and economic prospects… the Americans must find long-term solutions for solid fiscal policy and growth.”

One potential sticking point of Boehner’s plan is it would only raise the debt ceiling enough to cover a few months of US Treasury borrowing. President Obama has repeatedly said he will not accept any short-term deal.

“Standard & Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,’” said a statement from S&P.

“We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policy makers, it is likely to result in losses for commercial creditors.”

Moody’s meanwhile cut its rating for Cyprus by two notches, from A2 to Baa1. Both countries remain on negative outlook.

Over in New York, the volume of gold futures contracts traded on the Comex exchange soared to 423,981 on Wednesday – a 30% jump on the day before, and up 142% compared to Wednesday last week.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The monetary system that dates back to August 1971 shares one vital trait with its predecessor…

“LET ME lay to rest the bugaboo of what is called devaluation,” Richard Nixon told his fellow Americans on August 15 1971.

The 37th President had just announced the US would “temporarily” close the gold window – ending the convertibility of Dollars into gold that had been key to the postwar Bretton Woods system.

What didn’t change in 1971, though, was every bit as important as what did. Because the Dollar remained the world’s reserve currency – a “privilege” that, four decades on, looks increasingly like a curse.

When he made his address, Nixon was keen to allay fears he was undermining the Dollar’s value by cutting the link to gold – especially given the apocalyptic warnings (both in the press and inside the White House) of how disastrous such a move would be.

His pitch? ”If you want to buy a foreign car or take a trip abroad, market conditions may cause your Dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your Dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the Dollar.”

Any British viewers that day would have found it eerily reminiscent of prime minister Harold Wilson’s “Pound in your Pocket” speech four years earlier. Nothing would change besides the entire monetary structure. And now, back to your scheduled programming with Bonanza.

Here in 2011, it’s now been 40 years since the “temporary” suspension of Dollar convertibility. Has the Dollar been “stabilized”? Clearly not. But what’s worth noting is how much faster the Dollar’s domestic purchasing power has fallen in the last four decades – freed from gold – than it did in the 40 years before Nixon’s announcement.

Of course, Nixon tried to spin his economic reforms – the gold window closure was accompanied by a wage and price freeze and a 10% import tariff – as necessary for “building the new prosperity”. The logic was clear. A devalued Dollar, aided by the import tax, would increase America’s international competitiveness, while wage and price controls would prevent these policies feeding through into higher inflation.

At least, that was the plan. As we know, it didn’t turn out too well on the inflation front. But higher rates of inflation aren’t the only phenomenon we’ve seen since the early 1970s. The irony is, Nixon hoped to solve another problem by closing the gold window – the US trade deficit.

“The United States has always been, and will continue to be, a forward-looking and trustworthy trading partner,” he reassured the world on that fateful August evening. Within a minute, Tricky Dicky announced the 10% tax on imports.

Nixon hoped to improve America’s trade balance. Indeed, that was one rationale behind devaluing the Dollar by de-pegging it from gold. But it didn’t work:

The United States has not run a trade surplus since 1974. It has consistently imported more goods and services than it has exported. Most countries cannot do this for long. They need the revenues from exports to pay for imports.

The US is different, because it issues the world’s only reserve currency, which is used to settle most international trade. France’s finance minister under president Charles de Gaulle, Valéry Giscard D’Estaing, described this in the mid-1960s as America’s “exorbitant privilege” – the ability of the US to fund its trade gap by the creation of new Dollars, in which its imports are still denominated.

With gold convertible for Dollar bills, this “privilege” risked emptying the United States’ huge stockpile of monetary metal. But freed from that gold obligation in 1971, isn’t the privilege actually still a curse today?

The US was in a tricky position throughout the Bretton Woods era. Its problem was summed up by what became known as the Triffin Dilemma, after Belgian economist Robert Triffin. Because as the global economy expanded, he explained, more and more Dollar liquidity was needed to oil the wheels of international trade. And the US was the sole issuer of Dollars. So the only way the rest of the world could obtain Dollars was by exporting more to America than it imported – all but ensuring the US would run a trade deficit.

Of course, the US could seek to match its exports to its imports – but that risked a seize-up of global trade if foreigners could not get hold of sufficient Dollars to settle their trading with other, non-US parties.

That was one part of the Triffin Dilemma. The other concerned the link to gold, fixed at $35 an ounce. As more and more Dollars entered the system, so the ratio of Dollars to gold increased, putting upwards pressure on the Dollar gold price.

The London Gold Pool – whereby central banks clubbed together to keep gold prices down by co-ordinated gold sales – was set up in 1961 to address this problem. However, the system fell apart after France pulled out – De Gaulle preferring to swap his Dollars for gold rather than vice versa.

The open market gold price rose, accelerating the drain on US gold reserves, as arbitrageurs realized they could swap $35 for an ounce of US government gold and sell it for more elsewhere.

The fixed exchange regime of Bretton Woods, resting as it did on a $35 an ounce gold price, was unsustainable in a world of ever-increasing Dollar liquidity. Nixon had three choices – close the gold window, risk setting off a global deflationary spiral, or give away the United States’ remaining stockpile of metal. He closed the window.

The Dollar, however, remained the world’s reserve currency. This meant the US was now in a position – both at home and abroad – to really go to town exploiting D’Estaing’s exorbitant privilege. And looking back over the last 40 years, it looks like that’s exactly what successive administrations did.

We hear a lot today about “imbalances” in the global economy. One of the biggest imbalances is that the monetary unit of international trade is issued by a single nation. Gold was giving a strong signal of this disequilibrium half a century ago. Nixon, however, either misread the signals or willfully ignored them. Instead he blamed the Dollar’s travails on “international money speculators”.

By doing so, he pushed the world onto a whole new monetary system, one whose ultimate backing is the “Full Faith and Credit” of the United States government – and nothing more. It’s a worrying irony that a system resting on such “faith and credit” was mid-wifed by the man responsible for Watergate.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

“Overall, it is believed that market environment should remain favorable and positive technical momentum is likely to see gold test new highs in the near term,” adds Swiss precious metals refiner MKS.

A vote on Republican House of Representatives speaker John Boehner’s plan to cut the US deficit had to be postponed Wednesday – after the Congressional Budget Office found that his proposals would not actually produce the anticipated reductions in federal borrowing.

Congressional staff were “looking at options to rewrite the legislation” to meet Boehner’s pledge, the speaker’s spokesman Michael Steel said late on Tuesday.

Boehner’s fellow Republicans have indicated that they may not support the final plan when it goes before the House – now due to happen on Thursday.

Boehner says his plan will build on the principles of Cut, Cap and Balance – the bill, defeated in the Senate last week, which sought to enshrine a balanced budget in the US Constitution.

“The speaker’s plan falls short of meeting these principles,” Joseph Brettell, spokesman for the Cut, Cap and Balance Coalition – which comprises 100 campaign groups – said on Monday.

“We urge those who have signed the [Cut, Cap and Balance] pledge to oppose it and hold out for a better plan.”

“If [Boehner's plan] goes down or isn’t brought to the floor, you’re at a stalemate, there is no clear path forward,” says Chris Kruger, Washington-based political strategy analyst at MF Global.

The US Treasury has said it expects to hit the $14.3 trillion federal debt ceiling next Tuesday – although some analysts have said the US could still remain below that limit further into August.

“A debt hike is almost certain to be agreed before, or very soon after, the August 2nd deadline,” reckons Steve Barrow, currency analyst at Standard Bank.

“Instead, the real issue is deficit reduction…[which is] more likely to cause a debt downgrade than a missed bond payment.”

“I’m pretty certain that at least by one agency we’re going to see a downgrade,” adds Kathleen Gaffney, who co-manages the $21 billion Loomis Sayles Bond Fund in Boston.

Ratings agencies Moody’s and Standard & Poor’s have already put the US on review for a possible downgrade, with S&P saying earlier this month there is a 50% chance this will happen by the end of October.

One smaller ratings agency, Egan Jones – which appears on the Securities and Exchange Commission’s list of “Nationally Recognized Statistical Rating Organizations” – has in fact already downgraded US government bonds this month, lowering their rating from AAA to AA+.

“We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP,” the agency explained.

“If investor confidence in US government bonds wanes,” says one gold bullion dealer here in London, “the resulting downward pressure on the Dollar should be bullish for Gold.”

Away from the US debt ceiling impasse on Wednesday, politicians in Syria moved to ban anti-government demonstrations as continued unrest saw 21 protesters killed in the last 24 hours, according to Bloomberg.

The government in Beijing, in contrast, saw the value of its overseas assets rise by 7% in the year to March, according State Administration of Foreign Exchange figures reported by China Daily.

SAFE revealed Tuesday that overall, the value of offshore assets owned by China – home to the world’s second-largest private gold bullion market – stood at $4.4 trillion. The bulk of this, over $3 trillion, is held as reserve assets, which include foreign currencies, International Monetary Fund special drawing rights and gold bullion.

The 7% growth rate is slower than that published for year-end 2010. Back in May, SAFE reported the value of overseas assets had grown 19% compared with the end of 2009.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Inflationary or deflationary depression, it’s like the long boom of affordable mortgages never happened…

SO IS the U.S. housing market nearing its low? Priced against gold it just might be.

Falling hard as the gold price doubled and more since 2006, the average US home is now priced at 103 ounces of gold – little more than one gold bar for settlement of a 100-ounce Comex gold futures contract.

Housing has only been cheaper in 26 of the last 121 years, and is currently priced around half the long-run average of 201 ounces. But might there be further to go?

Unlike the fine content of a gold bar, necklace or tooth filling, no two residential properties are ever quite the same. Buying or selling the average home can only ever be notional, most especially in a nation of 313 million people, spread out between the shining seas.

But you get the idea, no doubt, as well as the point made on our chart above. Since the housing bust began, the average US home has lost over 70% of its value in gold. It’s dropped nearly 80% since the gold-market found its own floor back in 2001.

All told, swapping gold bars for bricks – whether as investment or a place to live – hasn’t looked this attractive since the inflationary depression of 1981. US housing’s previous low came during the deflation of the Great Depression. Never mind that the average US home doubled in size inbetween, or swelled another 40% since. Because whichever flavor of depression we’ve got today, the immutable object of unchanging, unencumbered gold has once more whipped back to its pre-20th century value against the ever-changing, credit-reliant market of residential housing.

It’s almost as if the “long boom” of easy credit never happened. At bottom, the average US home cost the equivalent of 71.5 ounces of gold in 1934. Forty-six years later, it fell below 77 ounces of gold. Today’s price tag of one Comex gold bar isn’t rock-bottom yet. But compared to the top of a decade ago, it’s getting there.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

U.S. DOLLAR gold bullion prices fell as London opened Tuesday, but held steady for the remainder of the morning around $1610 an ounce – 0.8% of yesterday’s all-time high.

Silver bullion prices were also steady, trading around $40.40 an ounce – up 0.8% from Friday’s close – while stocks and commodities rallied and US Treasury bonds fell following President Obama’s televised debt ceiling appeal on Monday.

“The precious metals, as with markets as a whole, look set for a busy, volatile few weeks with sovereign debt issues to remain at the front of trading sentiment,” says Swiss gold bullion refiner MKS.

“As long as the markets remain in a state of uncertainty…gold prices are sure to rise,” adds a note from analysts at Commerzbank.

US President Barack Obama went on television Monday to appeal for public support for a “balanced approach” to reducing the deficit.

Obama warned there would be a “deep economic crisis” if Congress does not agree to raise the $14.3 trillion federal debt ceiling – which will not happen unless agreement is reached on deficit reduction.

“If you believe we can solve this problem through compromise… let your member of Congress know.”

The web pages of leading Republicans John Boehner and Michelle Bachmann displayed error messages shortly after Obama’s address – suggesting they may have been overloaded with traffic.

The US Treasury says it will hit its borrowing limit on August 2 – one week from today.

“The sad truth,” said Boehner “is that the president wanted a blank check six months ago, and he wants a blank check today…that is just not going to happen.”

Over in Europe, Italy and Austria both cancelled bond auctions scheduled for August yesterday, the Wall Street Journal reports.

Italy’s Ministry of Economy and Finance cited its “large cash availability and limited borrowing requirement” for the decision to cancel the auction of medium- and long-dated bonds. Instead, 12 month Treasury Bills will be regularly offered, it added.

Spain meantime sold €2.89 billion of 3- and 6-month bills on Tuesday. The average yield on the 3-month bills rose to a three-year high at 1.899%, while the 6-month bills sold for an average yield of 2.519% – the highest since last December.

Here in the UK meantime the British economy grew by 0.2% in the second quarter – down from 0.5% for Q1.

“The fact the economy is growing more slowly than the Bank [of England] anticipated probably means they’re going to be a little bit more cautious about raising rates,” reckons Peter Dixon, economist at Commerzbank.

“I would say that pretty much writes off any chance of a hike in 2011 unless we get a growth miracle towards the end of the year.”

India’s central bank, however, announced Tuesday it is raising interest rates. The Reserve Bank of India’s repo rate – at which it lends to commercial banks – rose by half a percentage point to 8%, a larger rise than expected.

“Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance,” said RBI governor Duvvuri Subbarao in his quarterly policy review.

Inflation in India – the world’s largest gold bullion market – last month rose to 9.44%.

“We certainly have a far more hawkish central bank than we had six or seven months back, when there was a conscious effort to balance growth and inflation,” says Abheek Barua, chief economist at India’s HDFC Bank.

India has seen a sharp spike in gold jewelry sales as gold prices have risen, according to Daman Prakash, director of MNC Bullion in Chennai.

Gold mining workers in South Africa meantime are due to join other miners in strike action later this week. Mining firms including AngloGold Ashanti, Gold Fields and Harmony have offered pay rises between 7% and 9%. The National Union of Mineworkers however is holding out for a 14% pay increase.

South Africa was the world’s fourth-largest gold bullion producer in 2010.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

In the spring of 1989, students demonstrated for democratic reform in Beijing, China. The movement was centered in Tiananmen Square, at the heart of the capital.

I watched the unprecedented coverage from my London office.

On June 4, the People’s Liberation Army moved in, killing hundreds, if not thousands of protestors.

Two weeks later, I talked to my colleague in New York.

“If we want to get close to the Chinese, let’s go there now – while the rest of the world is treating them as a pariah.”

That year, I was stationed in London to run Philipp Brothers’ global precious metals and nickel business. Our commodity trading house had been doing business in China for decades. I had travelled to China several times. I had many contacts there, although they were all government business people and fiercely loyal to the communist government.

We knew that China was the future. Not only did China produce commodities, but she consumed more and more of them each year.

We knew that China would grow and become the most important player in the commodities markets in the decades to come.

We also knew that the commodity trading companies that developed the best relationships over there would not only have an edge in the markets, but with Chinese orders to buy and sell commodities, those with the relationships would run the markets.

I contacted the People’s Bank of China. We were quickly granted visas and appointments with the government agencies that bought and sold everything from gold and silver to copper and the other base metals.

Some of our colleagues (and most of our families and friends) told us that we were crazy to go, it was dangerous. But my colleague and I decided that it was in the best interest of our business to be the first ones there. So we travelled to Beijing at the end of June, just weeks after the massacre.

When we arrived the airport was quiet. The streets were quiet. There were very few foreign visitors. The situation was tense.

The day before our meetings, we visited the square. We looked around at the stains and holes in the pavement. It was a difficult site to behold.

The next day, we were careful to only discuss business with our hosts. They were happy to see us and thanked us profusely for coming.

We all attended a banquet that evening. After many toasts and shots of Mao Tai (which tastes like grain alcohol), our hosts loosened up.

They asked what we were hearing in New York and London. They called it propaganda and said that no one was hurt. The protesters were made to “see the light” and they retreated. It was the party line.

Then they proceeded to reveal the most interesting and perhaps most prophetic information of our careers…

China’s 100-Year Plan

Our hosts explained that China was on a path to reform, but it could not happen overnight. Slow and steady was the only path for the Chinese people to grow and prosper.

You see, according to our hosts, the Chinese had a 100-year plan.

Unlike Eastern Europe that would become a ward of the West after the collapse of the Berlin Wall, no one was there to support China if her economic environment collapsed. The difference was a combination of history and geography. China was on its own while Eastern Europe had the wealth of Germany, France and England to support it.

The Chinese explained that we would see the Eastern bloc countries struggle economically while China would maintain a slow and steady pace of economic reform and growth.

The future would prove that they were on the correct path.

Our dinner ended as did our meetings. It was a successful trip. We built a good relationship with several Chinese officials.

For quite some time, the Chinese came to us with their business, much to the dismay of our competitors. More than that, however, I learned something.

Our hosts were dead right in their predictions.

I do not condone what the Chinese government did in Tiananmen Square. But just as she did then, China knows her path now.

What China Buys, You Should Buy

In the last 22 years, the world has watched China blossom into the second most powerful economy in the world, soon to be the first. China is not beholden to anyone.

Today, with the country in building mode, China is the demand side of the equation in the world of commodities.

China continues to grow and consume. Her emerging middle class is the biggest in the world. As it expands in wealth and numbers, it will continue to support prices for all commodities and raw materials for decades to come.

Evidence of China’s hunger for commodities is felt when she routinely buys on price dips. The need for raw materials in China is significant, and the government understands that strategic stockpiles and investments in commodity-producing companies around the globe will ensure that the country has sufficient supply.

The message for investors is clear – follow China in business. When she buys, you should buy. China is still very much the future.

One way for investors to monetize this trend is to purchase a diversified commodity producing company that will benefit from China’s continued need for raw materials and higher commodity prices.

Rio Tinto PLC (NYSE: RIO) is such a company.

RIO is involved in each stage of metal and mineral production. The company produces aluminum, copper, diamonds, gold, coal, iron ore, uranium and industrial minerals. The company operates in over 50 countries, but primarily North America and Australia.

And, the stock is cheap. RIO is currently trading in the $70 range with a price-to-earnings ratio of 9.96 times earnings. It also pays a dividend of 1.51%. In 2008, RIO traded up to $125 per share.

This powerhouse commodity producer is an excellent way to continue to participate in China’s growth. I would buy RIO up to $74 per share. The stock is a long-term play on continued commodity consumption – which is the China story.

THE DOLLAR gold price held steady around $1619 an ounce Monday morning London time – up 1.2% from Friday’s close – just below its new all-time record of $1623 per ounce set at the start of the day’s Asian trade.

Stock and commodity markets and longer-dated US Treasury bonds all fell after it became clear Washington is no closer to solving its debt ceiling stalemate.

Silver prices meantime rose to $41.08 per ounce Monday morning – 2.5% up from Friday’s close – before easing back slightly.

“Against the backdrop of [the US debt ceiling] uncertainty, investors unsurprisingly flocked to the precious safe-havens of gold and silver,” says one gold bullion dealer here in London.

“A lot of [the gold price rise] is undoubtedly fear,” agrees Ben Westmore, commodities economist at National Australia Bank, adding that the outlook for US Treasuries and the Dollar is causing concern for traders.

“At the moment, the US is looking a bit unstable and gold is a pretty good substitute.”

Despite leaders from each party calling for a “bipartisan” solution, Republicans and Democrats are now preparing rival plans to deal with the US federal deficit. Eight days remain before the country hits its $14.3 trillion debt ceiling.

Congress will not raise the debt ceiling until it agrees on how to tackle the deficit.

House of Representatives speaker John Boehner said Sunday he is working on a proposal which would embrace the principles of Cut, Cap and Balance – a bill which called for a balanced budget to be made part of the US Constitution.

Cut, Cap and Balance was passed by the House last week but defeated in the Senate.

“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable.”

Ratings agency Standard & Poor’s this month warned there is a 50% chance it will downgrade the US within the next three months. Fellow ratings agency Moody’s has also put the US on review for a possible downgrade.

Central bankers in charge of foreign exchange reserves “must be more nervous than before,” says a senior official at the Bank of Korea – speaking to news agency Reuters on condition of anonymity.

“But nobody thinks Americans will choose suicide when they have known solutions.”

More crucial than the debt ceiling “will be the situation in housing, the jobs market and asset prices,” says London commodities consultancy VM Group in its latest Metals Monthly.

“If the jobless rate creeps back towards 10% and home prices slide further, then there remains little doubt that further [Federal Reserve] policy stimulus will be unveiled.”

A third round of quantitative easing “will prompt a fresh gold rally,” the consultancy reckons.

Here in Europe meantime Moody’s responded to last week’s announcement of a rescue package for Greece by pushing Greek sovereign debt even further into junk territory on Monday – from Caa1 to Ca.

“The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses,” said a Moody’s statement.

“If and when the debt exchanges occur, Moody’s would define this as a default by the Greek government on its public debt.”

Over in New York, figures from the Commodities Futures Trading Commission for the week ended 19 July show a jump of 11.3% in the net long position of bullish minus bearish contracts held by speculative futures and options traders.

Speculative shorts, however, remain “way above last year’s average…which still points to a gold price that is vulnerable to shifts in investor sentiment.”

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

SO in 1294, English king Edward I fell out with Philip IV of France – to whom he owed loyalty by also being Duke of Aquitaine – after English pirates raided French ships and sacked the port of La Rochelle.

Well known for enjoying a scrap himself (Edward had rebelled against his father at age 20, then swapped sides, then pillaged the Near East on a crusade, and then tore through Wales before earning the nick-name “hammer of the Scots”), he fast made alliances with France’s other enemies, and began raising money for war.

Step forward the Riccardi bankers of Lucca in Tuscany, Italy – who also happened to have major interests in France. Understandably annoyed at seeing these Italian bankers finance his enemy, King Philip seized the Riccardi’s assets in France, sparking a banking run by their creditors in Italy, which meant they couldn’t lend anything to Edward in England.

So the English crown moved on to borrowing from the Frescobaldi of Florence (expelled from England – and thus suffering default – by Edward’s son, the imaginatively titled Edward II, in 1311) before moving on again to the Bardi and Peruzzi families, already the key financiers to royalty in mainland Europe.

Opening offices in London, these Florentine bankers enjoyed two decades of high interest payments, plus trading profits on the English wool duties they managed for the crown. All told, on one modern estimate, the aggressive “conditionalities” of their loans meant they had seized and looted very nearly enough to cover the official outstanding debt of some £150,000 by the time Edward II defaulted in 1340 (he owed 10 times his annual revenues), helping take the Peruzzi down in 1343. The Bardi followed in 1346, worsening what one historian has called the first international debt crisis.

So what? Lovers of analogy will love this. Because in an overly-simplified way, “The paradigm may run as follows,” wrote Carlo Cipolla in The Monetary Policy of Fourteenth-Century Florence (and quoted by James McDonald in A Free Nation Deep in Debt)…

“The large companies of the dominant economy (Florence), which operate in the under-developed country (England), have a vital interest in securing the local raw material (wool) for the home market. By logic of events they are led to grant increasingly larger credits to the local rulers, on whose benevolence the licenses for the export of raw material ultimately depend. The rulers of the under-developed country, however, instead of using the credit to finance productive investment, squander the funds…and are soon forced to declare bankruptcy.”

According to Cipolla – writing 20 years ago – the paradigm “could be applied to the events of the 1970s.” The emerging-markets crisis of 1982 rings a bell too. A certain debt blow-up in south-eastern Europe this week looks equally fitting.

Difference is, medieval kings had such a poor rep’, they were regularly charged 40% per annum on their loans. Whereas Greece – although insolvent, and now in default – is getting three-decade money from its Eurozone partners at just 3.5% pa. Yes, Greece’s private-sector lenders (meaning Greek and of course foreign bankers) are being offered more than 6%, but only if they take a one-fifth loss on their capital first. And Ireland and Portugal, also unable to borrow anywhere else, are also getting 3.5% money from foreign taxpayers to cover their outstanding debts for the next 30 years.

Money has never been offered so cheaply in history. We doubt it will prove very valuable.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

WHOLESALE PRICES to buy gold rose to $1597 per ounce Friday morning in London – some 0.7% below Tuesday’s new record high – as global stock markets, commodities and US Treasury bonds all rose following last night’s announcement of a new rescue deal for Greece.

Silver bullion prices also rose, hitting $39.76 per ounce and heading for a 1.2% weekly gain.

Dollar prices to buy gold were broadly in line with where they started the week, but gold stood 0.8% lower against Sterling and 1.2% lower vs. the Euro.

“[The Greek bailout] could prove to be the start of a solution to the European debt crisis,” says one gold bullion dealer here in London.

“But it could simply be a move to delay the final reckoning for Greece. The markets will take a little time to make their mind up.”

“The financial sector has indicated its willingness to support Greece on a voluntary basis,” said the European Union statement, also outlining further aid from the €440 billion European Financial Stability Facility.

Like Greece, both Ireland and Portugal will also see the interest rate on their EFSF loans cut to just 3.5%.

Private-sector holders of Greek bonds, in contrast, will be given a “menu of options”. One involves rolling over existing bonds for 30 years at an interest rate of between 4% and 5.5%. Another would see new 30-year bonds paying up to 6.6%, but only with a 20% haircut (ie, loss) on bondholders’ existing capital investment.

Ratings agency Fitch responded by saying Greek bonds could be given a “restricted default” rating, because “an exchange that offers new securities with terms worse than the original contractual terms of the existing debt…constitutes a default event under Fitch’s ‘Coercive Debt Exchange Criteria’.”

On the open market Friday morning, the yield on 30-year Greek government bonds was trading at around 10%.

“These measures…create the best possible conditions for Greece and other peripheral countries to put their houses in order and hence limit the risk of contagion,” reckons Marco Valli, chief Eurozone economist at UniCredit, Italy’s largest bank.

“Still, the market will continue to price some probability that troubled countries will not be up to the challenge.”

“The EFSF has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo,” says Citigroup chief economist Willem Buiter.

Ongoing debt concerns in Europe and the US “are unlikely to dissipate just yet and would limit any pullback for gold,” reckons Andrey Kryuchenkov, London-based analyst at VTB Capital.

European Union member Bulgaria said Thursday it will delay talks on joining the Euro currency indefinitely.

The Moody’s rating agency today upgraded Bulgaria’s government bonds, praising the “strong liquidity and capital buffers of both the financial system and the government…sufficient to absorb shocks deriving from regional volatility.”

Meanwhile in Washington, US President Obama said he is “willing to cut historic amounts of spending in order to reduce our long-term deficits,” in an opinion piece published in Friday’s USA Today.

Obama adds that he would not make many of these cuts “if we didn’t have so much debt”.

The US Senate is expected to reject the so-called Cut, Cap and Balance bill after it was passed by the Republican-controlled House of Representatives on Tuesday. The bill calls for a balanced federal budget to be enshrined in the US Constitution.

“US debt talks are only of mild interest to me,” says one gold bullion trader in Singapore.

“The more important thing is the long-term implication – US government bonds used to be called a ‘risk-free asset’ and now we are seeing that concept fade away.”

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

U.S. DOLLAR gold bullion prices hovered around $1600 an ounce Thursday morning London time – 0.6% off Tuesday’s all-time high – as stocks and commodities dropped ahead of the European Union’s latest emergency summit on Greece.

Silver prices traded in a tight range around $39.90 per ounce – 1.6% up for the week so far.

“It seems unlikely that any real resolution can be found to [the Greek] issue on this occasion,” says Swiss gold bullion refiner MKS.

“Sovereign debt concerns in the Eurozone and US should continue to dominate precious metals, with uncertainty keeping investors interested in the safe-haven advantages of the complex,” agrees Marc Ground, commodities strategist at Standard Bank.

The Euro gold bullion price whipped violently this morning – hitting €1131 per ounce as European Union leaders were arriving at the emergency meeting in Brussels, before falling 1.2% to €1117 around lunchtime.

France and Germany have agreed a common position – after speaking on Wednesday with European Central Bank president Jean-Claude Trichet – press reports said, with the details to be unveiled at the meeting.

The Financial Times suggested that the joint proposal could include €71 billion in loans and €50 billion raised from a Eurozone bank tax. The bank tax proceeds could then be used to buy back around 20% of Greece’s €350 billion of outstanding debt.

However, “I don’t think there will be an agreement on that,” said Jean-Claude Juncker, chairman of the Eurozone finance ministers, adding that selective default by Greece could not be ruled out.

The Wall Street Journal, meantime reported that a deal could involve inviting creditors to exchange their bonds for new 30-Year bonds.

Trichet has previously said the ECB will not accept defaulted bonds as collateral – while Germany has pushed for private creditors to take losses as part of a new rescue deal.

“A haircut of around 50% of outstanding bonds should be targeted,” Germany’s council of independent economic advisors said Tuesday.

“There [also] needs to be a joint guarantee for all outstanding [Eurozone] debt,” Peter Bofinger, one of the Council’s members, said Thursday, warning of “the abyss of a major speculative attack on Italy.”

“[But] the consequences of this [Eurobond] policy will strangle Germany,” said former ECB chief economist and Bundesbank board member Otmar Issing earlier this week, and anyone promoting it “will prove to be the Euro’s gravediggers.”

“But unless EU leaders come up with a credible plan that addresses not only Greece but also the threat of contagion to Italy and Spain as well, any dip in gold will likely be short-lived.”

Data published Thursday showed signs of a slowdown in Eurozone economic activity. Germany’s composite purchasing manager’s index fell from 56.3 last month to 52.2 – its largest one-month fall since the end of 2008, and “a bit of a worry,” says Commerzbank economist Peter Dixon.

“The resolution to the crisis is going to be heavily dependent on a strong Germany.”

Across the Atlantic meantime US President Obama may be open to a short-term deal, said the White House, on raising the $14.3 trillion debt ceiling as a way of buying time for something bigger.

The US Federal Reserve however is actively planning for a US default, news agency Reuters said on Thursday. A default on US Treasury bonds could occur if the ceiling is not raised by August 2 – the date on which the Treasury expects to hit it.

Plosser notes that a US default would raise questions over the Fed’s lending to banks – which post US Treasury bonds as collateral.

“Do we treat them as if they didn’t default, in which case we would be saying we are pretending it never happened? Or do we treat them as if they defaulted and don’t lend against them?”

Over in China, the world’s second-largest gold bullion market, HSBC’s preliminary PMI fell from 50.1 last month to 48.9 – its lowest level since March 2009.

“We think the weak reading reflects seasonal factors as industrial activities tend to slow in the summer,” says a note from Barclays Capital.

BarCap also notes that the figure may policy tightening earlier in the year.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.